Merchant, Beware: That Surcharge May Be Illegal

Footnotes for this article are available at the end of this page.

As most consumers know, there is often a fee associated with paying by credit card. That fee, called a “surcharge,” allows the merchant to recoup the additional processing costs associated with accepting card payments. While surcharging has become a common practice in many places, it is illegal in several jurisdictions, including Colorado, Connecticut, Kansas, Maine, and Massachusetts.

In fact, there are actually ten states with laws prohibiting surcharging currently on the books. The five other states—California, Florida, New York, Oklahoma, and Texas—have had courts and government officials weigh in on the legality of their anti-surcharge statutes, mostly condemning them as restrictions on commercial speech that violate the First Amendment of the Constitution. As a result, the conventional wisdom within the payments industry today is that merchants in these states can impose surcharges without fear of prosecution under their purportedly unconstitutional anti-surcharge statutes.

But this view, which has been generally accepted by payments publications and legal analysts alike, is not entirely accurate. To be sure, subsequent developments in these states suggest, if not outright indicate, that the officials tasked with enforcing their anti-surcharge statutes may still decide to do so if the circumstances are right.

Take California, for instance. Although the court in the 2015 Italian Colors case famously struck down the state’s prohibition on surcharging as unconstitutional, the state Attorney General later appealed that decision to the Ninth Circuit. Three years later, the Ninth Circuit rendered a much more tempered opinion, declining to go as far as the lower court did in enjoining the statute in its entirety. Instead, the appellate court limited its decision to the merchants in the case, holding that the prohibition was unconstitutional only “as applied” to them, thereby preserving the statute and leaving open the possibility that it could be enforced against other merchants in a constitutional manner. Consistent with this reasoning, the state Attorney General subsequently issued a statement reiterating that the Ninth Circuit “did not generally prohibit” the enforcement of California’s anti-surcharge statute, suggesting that there are contexts in which he might apply it against merchants in the future.

Texas’ anti-surcharge statute has received similar treatment from its Attorney General. In 2018, the federal district court in Rowell v. Paxton (formerly styled Rowell v. Pettijohn) held that the statute was unconstitutional as applied to the merchants in that case, but its decision did not end there. Indeed, the court acknowledged that Texas is “free to prevent the dissemination of commercial speech that is false, deceptive, or misleading,” and suggested that the First Amendment analysis would be different if the merchants had sought to impose surcharges that were higher than their swipe fees. In a later opinion interpreting the Rowell decision, the state Attorney General highlighted this aspect of the court’s reasoning and advised that “circumstances may still exist where, as applied, [the anti-surcharge statute] operates to prohibit a credit card surcharge fee.” Based on the example cited by the court in Rowell, merchants could certainly anticipate that almost any flat surcharging fee would be illegal, since the cost of accepting a card payment varies with the transaction amount.

In the same vein, Florida’s Attorney General has signaled that she views its anti-surcharge statute as enforceable, notwithstanding constitutional challenges from merchants in federal court. As many industry players are aware, the Eleventh Circuit struck down Florida’s ban on surcharging in Dana’s R.R. Supply in 2015. But in 2018, the legislature enacted a new anti-surcharge state, which is still in place today. Although it is arguably immaterially different from the statute that was invalidated in Dana’s R.R. Supply, the state Attorney General has questioned whether that decision is even binding on state courts. Specifically, in a brief filed in a later enforcement action, the Attorney General refused to concede that the state’s anti-surcharge statute is unconstitutional, and contended that the Eleventh Circuit “is not the state trial court’s superior appellate court,” such that state courts “are free to disagree with lower federal courts’ interpretations of federal law, including the federal Constitution.” Perhaps because of this argument, the District Court of Appeal of Florida declined to affirmatively accept Dana’s R.R. Supply as gospel or otherwise rule on the constitutionality of the current anti-surcharge statute.

As for Oklahoma, a December 2019 opinion by its Attorney General has caused a degree of confusion about the status of the state’s anti-surcharge statute, even though its constitutionality has never been challenged in court. In the opinion, which was solicited by a state senator working with payments lobbyists, the Attorney General advised that “Oklahoma’s ban on surcharges for purchases using credit cards or debit cards…would violate the First Amendment to U.S. Constitution in the pricing schemes discussed in Italian Colors…and Rowell…if interpreted consistent with the plain meaning of surcharge.” Following the publication of this opinion, it was reported throughout the industry that surcharging is no longer illegal in Oklahoma, but that is not necessarily true. In fact, the Oklahoma Attorney General actually opined that he “cannot say definitively that no possible application of the statute is consistent with the First Amendment…Many pricing schemes are possible, and we have not considered…how all possible pricing schemes would fare under the First Amendment.” In other words, just as in Italian Colors and Rowell, the state Attorney General has acknowledged it is possible that Oklahoma’s statute could be enforced against merchants in a constitutional way.1

Finally, in New York, the widely discussed Expressions Hair Design case had a tortured route up to the United States Supreme Court, with a brief detour for questions certified to the New York Court of Appeals. After extension litigation, the state appellate court held that New York’s anti-surcharge statute permitted merchants to impose a surcharge as long as the total price for card purchases is displayed to the cardholder in “dollar-and-cents” form. The upshot of the court’s opinion was that the anti-surcharge statute survived constitutional scrutiny, since it could be applied in a way that does not run afoul of the First Amendment. As a result, merchants in New York could still be prosecuted under the state’s anti-surcharge statute for imposing surcharges without posting the total price in a manner that is consistent with the Expressions Hair Design decision.

At the end of the day, although courts and state Attorneys General have recently taken a dim view of anti-surcharge statutes, those laws remain on the books in ten states. Consequently, the question of whether to implement surcharging to offset card processing fees will be a calculated business risk for merchants, even in those jurisdictions where the anti-surcharge statutes have purportedly been invalidated on constitutional grounds.

Theresa Kananen and Edward Marshall are partners at Arnall Golden Gregory LLP and co-chair the firm’s Payments System practice. Morgan Harrison is an associate in the firm’s Litigation and Payments System practices. Theresa, Ed, and Morgan handle a variety of issues in the payments industry, including defending government lawsuits and investigations, advising on disputes governed by card brand rules, and engaging in general business and class action litigation.


[1] It bears mentioning that while it seems unlikely that the present state Attorney General will enforce Oklahoma’s anti-surcharge statute, it remains to be seen whether his successors—who are not bound by this opinion, which likewise has no precedential effect on any judge—will reverse course.

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